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2016 HFA Institute
Single-Family Financing Essentials:
MRBs
Current Market & Executions
January 14, 2016
Disclaimer
RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection
with RBC CM or Royal Bank Canada serving as Underwriter, Investment Banker, municipal advisor, financial advisor, swap counterparty or
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Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
1 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC
Market Conditions Will Drive Pricing Levels for an MRB Issuance
On December 15, 2015, the Federal Reserve raised interest rates for the first time in nearly a decade
10-Yr “AAA” MMD & 10-Yr Treasury January 1, 2013 to Present
Shift in “AAA” MMD & 10-Yr Treasury
Since January 2015
3.5%
2.6%
Treasury 10 yr
AAA GO 10 yr
2.4%
3.0%
2.2%
2.5%
2.0%
2.0%
1.8%
1.5%
1.6%
1.0%
1.4%
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
0.5%
0.0%
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Source: TM3, Thomson Reuters
10, year “AAA” MMD and 10 year Treasury shown to represent different average lives of municipal transactions
Rates as of January 12, 2016
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
2 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC
HFAs Can Utilize Numerous Approaches for a Fixed Rate Offering
Fixed Rate Mortgage Revenue Bond Issue Without Structure
 30 year level debt service
 Serial and term bonds
Higher cost
of funds
 No PAC bond
 Cross-calling
 Bond proceeds can acquire fully originated loan portfolio or acquisition fund (MBS or Whole Loan)
 Extended delivery (up to 6 or 7 weeks without pricing penalty) to mitigate negative arbitrage in acquisition fund
Fixed Rate Mortgage Revenue Bond Issue With Structure
 30 year level debt service
 Serial and term bonds
 Issuance will include a PAC bond
 Some limited ability to cross-call
 Bond proceeds can acquire fully originated loan portfolio or acquisition fund (MBS or Whole Loan)
 Extended delivery (up to 6 or 7 weeks without pricing penalty) to mitigate negative arbitrage in acquisition fund
MBS Pass-Through Bond
 30 year debt service
 One single maturity; par and premium structures
 Monthly redemptions from underling GNMA and GSE MBS
 Underlying collateral and average life expectations drive bond pricing
 Fully originated MBS portfolio required at bond settlement, though can sell blind pools
 No cross-calling
 Extended delivery (up to 6 or 7 weeks without pricing penalty)
 Ability to dual track production with TBA and asset sales
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
3 |Single-Family
Lower cost
of funds
Capital
Markets
RBCRBC
Capital
Markets,
LLC
The Tax Exempt Variable Rate Market Has Remained Stable and Can Reduce Interest Costs
The weekly SIFMA index has been set at 0.01% since October 23, 2015
Shift in Weekly SIFMA & 30-Day LIBOR
Since January 2015
Weekly SIFMA & 30-Day LIBOR January 1, 2013 to Present
0.5%
SIFMA
0.5%
30-Day Libor
0.50%
0.45%
0.4%
0.40%
0.4%
0.35%
0.3%
0.30%
0.3%
0.25%
0.20%
0.2%
0.15%
0.2%
0.10%
0.1%
0.05%
0.1%
0.00%
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Jan-15
0.0%
Source: TM3, Thomson Reuters, SIFMA
Weekly SIFMA Index and 30 day LIBOR shown to represent different average lives of municipal transactions
Rates as of January 12, 2016
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
4 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC
A Judicious use of Variable Rate Debt is Viable Approach for Select HFAs
Selected Recent Housing Issues
Date
05/21/2015
Issuer
North Dakota
Size
Use of Funds
$ 63,800,000 New Money
$
Fixed Rate
Variable Rate
46,100,000 $ 17,700,000
Variable %
28%
Bond Yield Facility Tenor
RBC Role
2.71%
7
Senior Manager, Direct Purchaser of
FRN, Swap Counterparty
2.89%
7
Senior Manager, SBPA Provider,
Swap Counterparty
2.88%
7
Senior Manager, SBPA Provider,
Swap Counterparty
2.84%
2
Swap Counterparty
07/23/2015
Connecticut
$ 160,800,000 New Money/Refunding
$
115,800,000
$ 45,000,000
28%
07/30/2015
Minnesota
$ 124,550,000 New Money/Refunding
$
106,325,000
$ 18,225,000
15%
08/18/2015
Iowa
$ 121,055,000 New Money/Refunding
$
81,055,000 $ 40,000,000
33%
09/04/2015
Wisconsin
$ 202,855,000 New Money/Refunding
$
158,650,000
$ 44,205,000
22%
2.49%
7
11/24/2015
Minnesota
$ 171,445,000 New Money/Refunding
$
136,445,000
$ 35,000,000
20%
2.56%
7
Senior Manager, SBPA Provider,
Swap Counterparty
Senior Manager, SBPA Provider,
Swap Counterparty
Treasury and Housing Bond Rates*
4.50%
4.00%
3.50%
3.00%
- 94 bps
- 69 bps
North
Dakota
2.71%
Connecticut
2.89%
- 60 bps
Minnesota
2.88%
- 61 bps
Iowa
2.84%
- 107 bps
- 79 bps
Minnesota
2.56%
Wisconsin
2.49%
2.50%
2.00%
1.50%
1.00%
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
30-Year Non-AMT Housing Bond
Bond Yield for 30-Year Fixed Rate Level Debt With Premium PAC
Pass-Through Bond
10-Year Treasury
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
5 |Single-Family
* Source: RBC CM and Bloomberg (for 10 Year Treasury Yields)
RBC Capital
Markets
RBC Capital
Markets,
LLC
Refunding Opportunities
HFAs can undertake current refundings of tax exempt, private activity mortgage revenue bonds
 A refunding can create excess spread
 1.125% of spread is permitted on single family MRB issues
 A refunding will lower the bond yield, while the loan characteristics of the transferred mortgage pool is remains largely unchanged
 Excess spread can be utilized to subsidize new mortgage loan productions at attractive lending rates
 Subsidized new money issuance at the time of the refunding
 0% pool
 Economics of a refunding can be enhanced with over-collateralization or use of structure and/or variable rate debt
2006 saw record municipal single family issuance – refunding opportunities exist as we approach 10 year optional redemption dates
Single Family Municipal Bond Issuance ($MM)
Source: Thomson Reuters
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
6 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC
Summary of Hypothetical Structure Options
New Money Bond Structures in Current Market
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Traditional
T/E Serials
Tax-Exempt
Swap with SBPA
Pass-Through w/ backloaded PAC
Taxable
Pass-Through
Scenario 6
Scenario 7
Traditional 30-Year,
Level Debt Service
Over collateralized
Front Loaded
Serial, Term and
Total Loans
$50,000,000
$62,500,000
$50,000,000
$50,000,000
$50,000,000
$50,000,000
$50,000,000
Serials
Terms
PAC
Pass-Through Bond
VRDO
Total Bonds
$11,065,000
$26,595,000
$12,340,000
$0
$0
$50,000,000
$21,460,000
$7,240,000
$21,300,000
$0
$0
$50,000,000
$0
$0
$0
$50,000,000
$0
$50,000,000
$10,555,000
$6,760,000
$16,710,000
$0
$15,975,000
$50,000,000
$0
$0
$0
$50,000,000
$0
$50,000,000
$0
$0
$0
$50,000,000
$0
$50,000,000
$10,555,000
$6,760,000
$16,710,000
$0
$15,975,000
$50,000,000
Overcollateralization ($)
-
$12,500,000
-
-
-
-
-
Swap Rate
Liquidity Fees
Remarketing Fees
-
-
-
2.33%
0.65%
0.10%
-
-
3.39%
0.65%
0.10%
Bond Yield
3.21%
2.42%
3.00%
2.78%
3.25%
3.25%
3.68%
Full Spread Loan Rate (w/ 1 point)
4.33%
3.54%
4.09%
3.90%
4.34%
4.34%
4.81%
Premium
Taxable Serials
Taxable
Swap with SBPA
Pass-Through w/ backloaded PAC
Notes:
Global - Bond coupons as of January 4, 2016; bond yields shown assume excess residuals are used to redeem bonds; assumes 100% GNMA loans with 1point and 50bps servicing fee
PAC bond assumes a 4% coupon and is priced at 100% PSA to yield 2.10% (plus 91bps to 5 year MMD)
Scenario 1 - Traditional 30-year level debt structure
Scenario 2 - Structured at 0% PSA; overcollaterization assumes a WAM of 240 months and a weighted average loan rate of 6.00%.
Scenario 3 - Tax-exempt monthly pass-through structure priced at par to yield 3.00%
Scenario 4 - Tax-exempt, structured at 0% PSA, par termination rights in swap (coterminous with liquidity) assumed to be 2.33% (.20% during the first 3 months), 65bps RBC liquidity facility, 10bps remkt. fee, Total Swap Cost = 3.08%.
Scenario 5 - Taxable monthly pass-through structure priced at par to yield 3.25%
Scenario 6 - Taxable monthly pass-through structure at premium, priced (up to 105%) at 100% PSA to yield 3.25%
Scenario 7 - Taxable, structured at 0% PSA, par termination rights in swap (coterminous with liquidity) assumed to be 3.39% (.20% during the first 3 months), 65bps RBC liquidity facility, 10bps remkt. fee, Total Swap Cost = 4.14%.
Each structure has its pros and cons, and should be evaluated based upon program requirements and risk tolerances of each HFA.
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
7 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC
Why Mortgage Revenue Bonds?
Add spread producing assets to HFA balance sheets
Some HFA balance sheets have decreased 50% or more in recent years
Reliable income stream realized over life of loans
HFAs can dual track mortgage loan production with TBA and other sales
Potential uncertainty of TBA market once Fed stops its purchases
Moody’s pointed out in late 2014 that if HFAs do not return to their previous business model of financing onbalance sheet mortgage loans to create a more predictable revenue stream to help support their operating
costs, their portfolio performance could dip. Moody's says such a dip could lead to a negative sector outlook
Financing
MRBs I January
14,8,2016
Colorado Housing
andEssentials:
Finance Authority
| January
2016
8 |Single-Family
RBC Capital
Markets
RBC Capital
Markets,
LLC